Does a Loan Modification Ensure You Won’t Default on Your Mortgage?

by tammy on July 2, 2010

In a word: no, getting a loan modification does not assure anything, much less whether or not you will default. A mortgage loan modification is nothing more than an agreement between you and your lender for an adjustment of the terms which should allow you to maintain your monthly obligations. That is, loan modification simply reduces the amount of your monthly payment, but otherwise offers no protections or guarantees of any sort.

As a general rule, all mortgage loan modifications are detrimental to the interests of the lender since they result in either the lender receiving their money back over a longer period of time or – much less commonly – receiving back less money than was originally agreed to. As such, mortgage lenders generally view loan modifications as a “lesser evil” as opposed to simply foreclosing on the property and reselling it. This means that any loan modification that will be accepted by a lender still requires you to make a significant monthly payment and failing to do so will still result in a default and foreclosure despite a modification.

It is also important to understand that any loan modification agreement has to have the willing acceptance of the lender. There is no law or process that mandates that a lender has to accept any sort of loan modification, even those proposals done through the federal government’s Home Affordable Modification Program (HAMP). Although some people argue that a forensic mortgage audit and other means somehow “entitle” you to a loan modification, in reality this is not the case at all. In fact, adopting an adversarial role against your lender is very likely to result in the lender opting to foreclose regardless of whether you can make your payments or not simply because they would rather not deal with you.

Regardless of what sort of loan modification you manage to talk your lender into, the result has to be significantly better for the lender than a foreclosure would be. This means it is inevitable that you will still be expected to make a significant monthly payment. Further, if you fail to successfully maintain your payments after a loan modification has been carried out, your lender is much less likely to work further with you. So if you begin missing payments, making late payments, or partial payments after a loan modification, your lender is much more likely to simply write you off as a valued borrower and initiate foreclosure proceedings against you.

The lender will never accept a loan modification agreement unless they are convinced that the only alternative is foreclosure and as this is the case they generally view it as the last alternative to foreclosure. Further, you financial distress and hardship has to be fully documented, so you have to be able to show that you can make the payments after modification before the lender will accept the proposal. Therefore, if you have problems with making your monthly payments even after a loan modification, the lender is likely to conclude that foreclosure is the only alternative. Loan modification, in of itself, offers no assurance against default if you are unable (or willing) to make your payments properly.

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